Where's the cash?

Don't just manage to the top line or the bottom line. Manage for cash!

by Ron Stone

Many businesses today continue to focus all their efforts toward sales or profits only to constantly struggle to pay their bills. Why? Because in their quest for more sales or profits, managers and owners often make decisions without either knowing or understanding a decision's full effect on the business's cash flow. 

Yes, every businessperson worries about cash flow, but few understand or consider how major decisions fully effect cash flow.

I did some work on an employee incentive program for a building supply house a couple of years ago. It seems that the employees continually received bonuses from their current incentive plan while the owner never had money to pay himself, much less make special purchases.

My review of his plan determined that it only rewarded top-line performance. For example, there were no rewards for selling higher margin products (substitutions, etc.) or penalties for keeping excess inventories so as to never miss a sale. Every time the business got into a cash crunch from unexpected bills or an unexpected dip in sales, the owner would slash inventory buying. Unfortunately, this often meant not buying the high-turnover items that moved fastest. This resulted in a continual buildup in slower moving items and "out of stocks" on faster moving items.

What was the solution? Among other changes, I designed a new incentive plan tied to cash flow goals established in a new annual budget. In the very short term, some of the pain the owner experienced was transferred to the employees (employees learn very fast when their pay drops). However, good communication and teamwork minimized this painful period. Pretty soon, everyone was working together toward common goals — positive cash flow.

The key to managing for cash — or more accurately, positive cash flow goals — is to fully understand and take into account the effect you and your organization's daily decisions have on your cash flow. The above incentive plan is one example.

Another powerful tool is a what-if analysis model. Such a model is usually built around a budget, another tool that every business should continually measure itself by. A budget should be a "living" document, not just an annual exercise that gathers dust on a shelf. 

A well-constructed budget not only allows you to measure your results but it provides a basis for the what-if analysis tool. It can be used in making significant buying or selling decisions such as inventory buying or hiring of a new salesperson. You simply plug your budget into the model (adjusted for known variations) and change various components that a potential decision affects, typically over a four- to six-month period.

These might include the effect on cash of buying or stocking certain items for a new customer or sales campaign, compensation for a new salesperson or changes in your customer charge policy. Such items are almost endless.

The key here is to realistically quantify the effect of major decisions on your entire business's cash flow before you make them rather than be surprised several months later at their effect on your cash flow.

In summary, manage your business more scientifically and for cash flow to avoid those little surprises and the resulting stress. We can all benefit from less stress.

Ron Stone & Associates is a financial and management consulting firm specializing in helping companies improve their results through various tools (software, etc.) it develops or has developed for its clients. He can be reached at or at .

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